While IDFC’s third-quarter 2016 earnings continued to fall year over year as the firm transitioned to a banking entity, positive profits for the quarter were a silver lining, as there were no exceptional charges or high provisions this quarter.
We believe that the firm is on its way to reporting fiscal 2016 earnings per share of close to our estimate of negative INR 1, versus the negative INR 7 EPS it has reported in the first nine months. We make no changes to our estimates, and our fair value remains at INR 90 per share, as we believe much of the value in IDFC is derived from its 53% equity holding in the separately listed IDFC Bank. To further elucidate this relationship, the bank formed 78% of IDFC Limited’s operating income during the quarter, and 73% of its profit after tax and minority interest adjustments.
The bank is still in startup mode (the December 2015 quarter was only its first quarter of operations) and IDFC Limited will need to reduce its holding in the bank over time, as per regulatory requirements. We continue to maintain our very high uncertainty on this stock, and we caution investors against taking a large position in this no-moat business-in-transition, as it trades at less than half of our fair value estimate.
The bank, however, has started on a strong footing; as of December, it boasts a reported current and savings account deposits/total deposits ratio of 20%. Its advances increased by 3% in its first quarter, as 24 branches were already up and running for business. Furthermore, given the strong balance sheet of the IDFC parent, the bank is adequately capitalised for future growth, with a Tier 1 capital ratio of 20%, and will not need fresh funds for the next few years.
